ESMA clarifies external support within the meaning of Article 35 of the MMF Regulation

Context and objectives

On 9 July 2020, the European Securities and Markets Authority (ESMA) published a public statement on the prohibition of providing external support to money market funds (MMFs) under Article 35 of the Regulation (EU) 2017/1131 (MMF Regulation). This is in light of liquidity challenges faced by certain MMFs and recent steps taken by financial market authorities to mitigate the impact of COVID-19 on the EU’s financial markets. The statement is a reminder of the conditions that the aforementioned intermediation must comply with under the MMF Regulation’s requirements.

While MMFs may enter into transactions with affiliated or related parties in usual circumstances, Article 35 of the MMF Regulation prevents them from receiving external support, defined as “direct or indirect support offered to an MMF by a third party, including a sponsor of the MMF, that is intended for or in effect would result in guaranteeing the liquidity of the MMF or stabilizing the NAV per unit or share of the MMF”.

In that context, MMFs may enter into transactions with third parties, including affiliated or related parties, provided both requirements of Article 35 of the MMF Regulation are met:

• External support shall include, amongst other examples, the “purchase by a third party of assets of the MMF at an inflated price”: To examine whether a third party provides the external support referred to here, transactions with third parties relating to the MMF’s assets are not purchased at an inflated price where they are executed at arm’s length conditions (point 2.b); and
• External support shall include “any action by a third party the direct or indirect objective of which is to maintain the liquidity profile and the NAV per unit or share of the MMF”: An indication of the direct or indirect objective referred to here is where third parties execute transactions solely with the MMFs to which they are affiliated (point 2.e).
   

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